One of the most important aspects of overall financial health is properly preparing for retirement. Two of the most popular retirement accounts are 401ks and pensions plans. While they are both very popular, the two accounts are actually quite different.
One difference between a 401k and a pension is the way an employer contributes to the account. A 401k is largely funded by the employee. However, some employers may contribute up to a small percentage of the employee's salary as an additional benefit. On the other hand, a pension is 100% funded by the employer. Based on the plan, the employer will hold back a certain percentage of an employee's paycheck. When the employee retires, they will receive a monthly check based off of their pre-retirement income.
Control over Investments
The second difference between a 401k and a pension is how the investments are controlled. In a 401k plan, the employee gets to control their investments. They normally have multiple funds to choose from and can allocate their investments as they wish. With a pension plan, the investments are not controlled by the employee. Instead, the investments are controlled by an investment manager who invests the pension plan in a variety of different funds.
The third difference between a 401k and a pension is guarantee. With a 401k, the amount of money remaining in the employee's account is based solely on their historical deposits and the rate of return they received on their investments. With a pension, an employer is guaranteed to receive a paycheck for the rest of their lives following their retirement. However, the pension holder will not be able to pass their pension down to their children.